Fitch Ratings has revised the outlook on China's local currency outlook from stable to negative, citing elevated credit growth, the sharp rise in real-estate valuations and the emergence of inflation.
Fitch sees a high likelihood of a significant deterioration in asset quality in the Chinese banking system in the next three years.
Concerns continue to increase over the quality of property-related lending that are now compounded by the rapid increase in new 'off-balance' sheet channels of credit, for which disclosure is “extremely” poor.
China's banking system has scored D/3 in Fitch's macro-prudential risk framework since June 2010, indicating a relatively weak system in the highest category of vulnerability to systemic risk.
Materialization of problems in the financial sector leading to a need for sovereign support would be more likely to affect the local currency debt profile, as the system is almost “all” Chinese yuan-denominated, with a dollarization ratio of only 2.1 percent in 2010.
Weaknesses in some credit and economic fundamentals weigh on China's ratings. Average per capita income of US$4,300 in 2010 was well below the A range median of US$17,400, while China's scoring in international rankings of human development levels and governance standards lag A-range norms.
China’s strength of its sovereign's balance sheet provides it with substantial resources with which to handle the emergence of problems in its financial system. Yes, problems at the gate.
Just released yesterday: Prices of new homes in China's capital Beijing plunged 26.7 percent month over month (m/m) in March while average prices of new houses in March fell 10.9 percent while home purchases fell 50.9 percent year over year and 41.5 percent m/m.
Vice-Minister of Finance Li Yong, in an article published yesterday on the ministry's website says: “China is expected to face great inflationary pressure in the future due to higher costs and an abundant global money supply … China's present inflationary situation is severe and hard to handle … efforts in energy conservation, environmental protection, resources price reform and workers' wage increases will cause cost-driven inflationary pressure … China is now in the process of economic restructuring, and increasing prices due to higher costs during the period will be a long-term process.”
Interestingly, in that same article Vice-Minister of Finance Li Yong also warns that the eurozone debt crisis is likely to worsen and expand, adding that the possibility of some debt issuers will default cannot be ruled out.
He expects “relatively great pressure” for China's exports this year due to a stronger yuan and a deteriorating foreign trade environment.
Depreciation of both the U.S. dollar and the euro will hamper China's exports growth and make China’s management of foreign exchange reserves more difficult. Keep in mind that the dollar and the euro together account for about 91 percent of the US$2.85 trillion of reserves as of Dec. 31, 2010, and it’s easy to understand why the Chinese are seriously worried about the PPPs (Purchasing Power Parity) of their reserves.
Yes, no doubt that China faces monumental problems that could affect everybody.
At the same time, the just released Organization for Economic Co-operation and Development (OECD) area unemployment rate confirms the practically jobless recovery we continue to experience. OECD area unemployment is only down 0.1 percent to 8.2 percent in February. New March 2011 data show further (too?) small declines of 0.1 percentage point in the unemployment rates of both the United States (to 8.8 percent) and Canada (7.7 percent). The eurozone rate fell also only slightly to 9.9 percent while Austria, Korea, Mexico and Spain all saw rises. Rates remain “very high” in Hungary (12.0 percent), Ireland (14.9 percent), Portugal (11.1 percent), the Slovak Republic (14.0 percent) and Spain (20.5 percent).
Unfortunately, in my opinion, “insecurity” remains a dominating force all over the world: be it in MENA (Middle East and North Africa), Japan, the eurozone in its peripheral “sovereigns,” with unsustainable U.S. debt levels, food prices, inflation, etc., yet to be reckoned with.
Therefore, I remain on the defensive and continue to favor oil, gold, the Norwegian kroner, the Swedish kronor, the Canadian dollar as well as the Swiss franc, especially against the euro.
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